FDI

KES SHROFF COLLEGE OF ARTS AND COMMERCE NAAC Accredited ‘A’ Grade (CGPA 3.16) and ISO 9001:2008 Certified

PROJECT REPORT ON FOREIGN DIRECT INVESTMENT SUBMITTED BY KINJAL V. RUPANI

T.Y.B.Com. FINANCIAL MARKET

(SEMESTER V)

SUBMITTED TO

UNIVERSITY OF MUMBAI

PROJECT GUIDE

MR. KAPIL THAKORE

ACADEMIC YEAR

2012 – 2013 KANDIVLI EDUCATION SOCIETY’S

B.K. Shroff College of Arts & K.E.S SHROFF COLLEGE

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M.H. Shroff College of Commerce Bhulabhai Desai Road, Kandivli (West), Mumbai – 400067 NAAC Accredited ‘A’ Grade(CGPA 3.16) and ISO 9001:2008 Certified

PROJECT REPOET

FOREIGN DIRECT INVESTMENT SUBMITTED BY KINJAL V. RUPANI

T.Y.BACHELOR OF COMMERCE IN FINANCIAL MARKETS (SEMESTER V th)

SUBMITTED TO

UNIVERSITY OF MUMBAI

PROJECT GUIDE

NAME OF THE GUIDE Mr. KAPIL THAKORE

ACADEMIC YEAR

2012 – 2013 KANDIVLI EDUCATION SOCIETY’S

B.K. Shroff College of Arts & M.H. Shroff College of Commerce K.E.S SHROFF COLLEGE

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Bhulabhai Desai Road, Kandivli (West), Mumbai – 400067 NAAC Accredited ‘A’ Grade(CGPA 3.16) and ISO 9001:2008 Certified

C E R T I F I C A T E

This is to certify that KINJAL V. RUPANI of T.Y.B.Com. (FINANCIAL MARKET) has successfully completed a project on FOREIGN DIRECT INVESTMENT for the Semester – V under the guidance of MR. KAPIL THAKORE during the academic year 2012-13.

Co-ordinator

Project Guide

Internal Examiner

Principal

External Examiner

College Seal

K.E.S SHROFF COLLEGE

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DECLARATION

I MS. KINJAL .V. RUPANI of K.E.S. SHROFF COLLEGE OF ARTS & COMMERCE, student of T.Y.BCOM (Bachelor Of Financial Market), Semester Vth, hereby declare that I have completed my project title FOREIGN DIRECT INVESTMENT. I also declare that this project which has been the partial fulfillment of the requirement of the degree of T.Y.B.COM (Bachelor of Financial Market ) of the ―Mumbai University ‖ has been the result of my efforts.

Signature of Student _________________


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ACKNOWLEDGEMENT

I have sincerely done my project allotted to me. I would like to thank MR. VAIBHAV R. ASHAR the guide for giving her valuable suggestion and guidance.

I would also like to thank our Principal Dr. LILY BHUSHAN and our vice Principal Mr. V.S.Kannan.

It gives me immense pleasure to present this project in the course of Financial Market, and I also would like to share the credit with Mrs. ALKA WADHWANA for her valuable, helps in this project. I would like to thank all those people who gave me their opinion without their help this project would not be possible to submit in time.


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INDEX CHAPTER NO.

TOPIC

1 2 3 4 5

Introduction of foreign direct investment History of foreign direct investment Impact of FDI on Indian economy Factors responsible for FDI inflow to INDIA Overview of the regulatory framework by the government for FDI in India Benefits of Foreign Direct Investment and Disadvantages of Foreign Direct Investment (Host Country) Policy reforms on foreign direct investment in India FDI and its role in the economic development Role of Foreign Direct Investment in Indian Stock Market Guidelines for FDI in banking Sector wise distribution of FDI inflows in India Foreign institutional investors Difference between FDI and FII Depository receipts Global depository receipts. American Depository Receipt Indian Depository Receipts A comparative analysis of India‘s and China‘s FDI flow Conclusion Bibliography

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20


PG NO. 7 8 10 13 15

16

18 24 26 28 29 37 39 40 41 45 51 55 56 57

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CHAPTER-1 INTRODUCTION OF FDI Direct investments in productive assets by a company incorporated in a foreign country, as opposed to investments in shares of local companies by foreign entities. An important feature of an increasingly globalized economic system. Any investment flowing from one country to another country is foreign investment. The management of a business enterprise in a foreign country is foreign investment. Indian Government classifies foreign investment in the following form:

-resident Indian (NRI) investment Foreign investments in the country can take the form of investments in listed companies (i.e., FII investments), investments in listed/unlisted companies other than through stock exchanges (i.e., through the foreign direct investment or private equity/foreign venture capital investment route), investments through American Depository Receipts/Global Depository Receipts (ADR/GDR), or investments by non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) in various forms.


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CHAPTER-2 HISTORY OF FDI IN INDIA At the time of independence, the attitude towards foreign capital was one of fear and suspicion. This was natural on account of the previous exploitative role played by it in ‗draining away‘ resources from this country. The suspicion and hostility found expression in the Industrial Policy of 1948 which, though recognizing the role of private foreign investment in the country, emphasized that its regulation was necessary in the national interest. Because of this attitude expressed in the 1948 resolution, foreign capitalists got dissatisfied and as a result, the flow of imports of ca[ital goods got obstructed. As a result, the prime minister had to give following assurances to the foreign capitalists in 1949: 1. No discrimination between foreign and Indian capital. The government o India will not differentiate between the foreign and Indian capital. The implication was that the government would not place any restrictions or impose any conditions on foreign enterprise which were not applicable to similar Indian enterprises. 2. Full opportunities to earn profits. The foreign interests operating in India would be permitted to earn profits without subjecting them to undue controls. Only such restrictions would be imposed which also apply to the Indian enterprises. 3. Guarantee of compensation. If and when foreign enterprises are compulsorily acquired, compensation will be paid on a fair and equitable basis as already announced in government‘s statement of policy. Though the Prime Minister stated that the major interest in ownership and effective control of an undertaking should be in Indian hands, he gave assurance that there would be ―no hard and fast rule in this matter.‖ By a declaration issued on June 2, 1950, the government assured the foreign capitalists that they can remit the he foreign investments made by them in the country after January 1, 1950. in addition, they were also allowed to remit whatever investment of profit and taken place. Despite the above assurances, foreign capital in the requisite quantity did now flow into India during the period of the First plan. The atmosphere of suspicion had not changed substantially. However, the policy statement of the Prime Minister issued in 1949 and continued practically unchanged in the 1956 Industrial Policy Resolution, had opened up immense fields to foreign participation. In addition, the trends towards liberalization grew slowly and gradually more strong and the role of foreign investment grew more and more important. The government relaxed its policy concerning majority ownership in several cases and granted several tax concessions for foreign personnel. Substantial liberalization was announced in the New Industrial Policy declared by the government on 24th July 1991 and doors of several industries have been opened up for foreign investment.


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Prior to this policy, foreign capital was generally permitted only in the those industries where Indian capital was scarce and was not normally permitted in those industries which had received government protection or which are of basic and/or strategic importance to the country. The declared policy of the government was to discourage foreign capital in certain inessential‗ consumer goods and service industries. However, this provision was frequently violated as a number of foreign collaborations even in respect of cosmetics, toothpaste, lipstick etc. were allowed by the government. It was also stated that foreign capital should help in promoting experts or substituting imports. The government also laid down that in all those industries where foreign capital investment is allowed, the major interest in ownership and effective control should always be in Indian hands (this condition was also often relaxed). The foreign capital investments and technical collaborations were required to be so regulated as to fit into the overall framework of the plans. In those industries where foreign technicians and managers were allowed to operate as Indians with requisite skills and experience were not available, vital importance was to be accorded to the training and employment of Indians in the quickest possible manner.


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CHAPTER-3 IMPACT OF FDI ON INDIAN ECONOMY Foreign direct investment in India has grown immensely in the last 5 years due to strong support from the Union Government. This growth has in turn helped with the progress of the national economy. Recently, the South-East Asian country has strived hard to draw FDI from the leading investors of the world. Financial collaborations Capital markets via euro issues Preferential allotments or private equity Joint ventures In the last few years the following sectors have attracted the maximum FDI as per a fact sheet brought out by the Department of Industrial Policy and Promotion: Services Automobile Computer hardware and software       

Power Telecommunications Metallurgical industries Real estate and housing Petroleum and natural gas Construction Chemicals with the exception of fertilizers

The FDI laws forbid investment in the following sectors:     

arms coal nuclear mining railway 3.1 Impact of FDI on Indian Economy 



India has recently liberalized its FDI policy and decided to allow 100 percent international investment in the single brand retail segment. Reforms to industrial policies have brought about significant reductions to requirements regarding to licensing and done away with restrictions related to expansion and made it easy to use international technology. The real estate sector has performed well in recent times and much of the credit in this instance can be given to the relaxed FDI regulations and the properly performing economy.


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



      

The Indian government has been trying hard to do away with the FDI caps for majority of the sectors but there are still critical areas like retailing and insurance where much thought needs to be given before more FDI is allowed. India is the 3rd biggest economy of the world in terms of purchasing power parity and is thus a popular destination when it comes to FDI. Following are the major economic sectors where it can attract investment:

telecommunications apparels information technology pharmaceuticals auto components jewelry chemicals

Foreign investments in India have increased of late but the strict FDI policies have impeded the possible growth in this sector. India is however set to become one of the major recipients of FDI in the Asia-Pacific region because of the economic reforms for increasing foreign investment an d the deregulation of this important sector. India has technical expertise and skilled managers and a growing middle class market of more than 300 million and this represents an attractive market. 3.2 How FDI is calculated? Foreign direct investment can be defined, according to national accounting principles, as the net investment inflow that is necessary for acquiring long term management interest in an organization that is operating in a different country. Long term management interest can be calculated as at least 10% of the voting stock of a company. It is the aggregate of equity capital and other long term and short term capital that are reflected in the balance of payments. A foreign direct investor normally takes part in the following areas of an organization‘s operations:    

management technology transfer joint ventures expertise transfer

There are two major types of FDI – inward FDI and outward FDI. Together these values are used to calculate the stock of foreign direct investment and the net FDI inflow. Direct investment, however, does not include buying shares. FDI can be cited as an example of international factor movement 3.3Union Government FDI Measures


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The Union Government has allowed 100 percent FDI in cash and carry wholesale trade sector apart from the single brand retail market. It has also opted to allow 51% FDI in the multi brand retail segment. However, this will be implemented in accordance to certain predetermined conditions. At present, it is trying to come to a consensus on this matter with the various state governments.


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CHAPTER-4 FACTORS RESPONSIBLE FOR FDI INFLOW TO INDIA A large number of factors are held responsible for FDI Inflow to India. Foreign Direct Investment inflow made its entry in India for the first time during the year 1991-92 with the aim to bring together the intended investment and the actual savings of the country. 4.1 AN OVERVIEW OF FACTORS RESPONSIBLE FOR FDI INFLOW TO INDIA

To pursue a growth of around 7 percent in the Gross Domestic Product of India, the net capital flows should increase by at least 28 to 30 percent on the whole. The savings of the country stood at 24 percent. The gap formed between intended investment and the actual savings of the country was lifted up by portfolio investments by foreign institutional investors, loans by foreign banks and other places, and foreign direct investments. Among these three forms of financial assistance INDIA prefers as well as possess the maximum amount of foreign direct investments. Advantages of foreign direct investments FDI inflows raise the capital for investment. Foreign capital has taken over the domestic capital in terms of purchasing issue. Domestic capital is usually used for invested in other sectors of the Indian market. Foreign direct investment in Greenfield ventures, has introduced technological advancement and contemporary techniques for management in INDIA which the country lacked badly before FDI made its entry. The inflow of foreign capital in INDIA has opened up a plethora of options in the Indian market by ensuring foreign capital shares which stabilizes the country‘s economy. India ranks 17th in terms of foreign direct investments inflows, and FDI inflows among all other developing nations.

has 1.4 percent shares in

India attracts the maximum FDI inflows India is potentially active in terms o f investments and provides a galore of opportunities to the foreign players into the market. Foreign companies who aspire to become a global player would grab the opportunities, INDIA provides in terms of investments. The foreign companies enjoy the rights to set up branch offices, representative offices, and also carry out outsourcing activites in terms of software developmental programmes in INDIA . All these have opened up innumerable options for the foreign investors to expand their businesses at a global level. These are some of the factors which led to FDI inflows in INDIA. Market potential in INDIA for attracting FDI inflows. India is claimed to be the fifth largest economy across the globe and ranks third in the gross domestic product in the entire ASIA, which is one of the most significant factors responsible for FDI inflows in India. Besides, India belongs to those rarest of countries, which offers K.E.S SHROFF COLLEGE

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maximum opportunities through various industrial units. India offers maximum opportunities for foreign investments, which have been a major cause behind the flourishing economy of the country. The FDI inflows in Indian market as accounted for the year 2006-07, stood at USD 2,171 million. 4.2 Fdi inflows from the year 2005-2006 to 2009-2010

Hypothesis The study has been taken up with the following hypothesis:  Flow of FDI shows a positive trend over the period 1991-2011.  FDI has had a positive impact on economic growth of the country.


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CHAPTER-5 OVERVIEW OF THE REGULATORY FRAMEWORK BY THE GOVERNMENT FOR FDI IN INDIA From 1991, trade liberalisation in India has been accompanied by a process of gradual liberalisation of capital flows management regulations. Foreign Direct Investment (FDI) by nonresident in resident entities through transfer or issue of securities to persons resident outside India is a „capital account transaction and Government of India and RBI regulate the same under the Foreign Exchange Management Act, 1999 (FEMA) and various regulations framed under the Act. RBI is given primary authority to regulate capital flows through FEMA. Notably, Section 6 of FEMA authorizes the RBI to manage foreign exchange transactions and capital flows in consultation with the Ministry of Finance. SEBI (Foreign Institutional Investors) Regulations, 1995 (FII Regulations) have facilitated the regulation of portfolio investments and strengthened India‘s opening to world markets. Supplementing RBI and SEBI, the other institutional bodies regulating capital flows include the Forward Markets Commission (FMC), the Insurance Regulatory and Development Authority (IRDA) and the Pension Fund Regulatory and Development Authority (PFRDA). The two routes for foreign investments - the foreign direct investment route and foreign portfolio investment route are the key constituents of this co ncept paper. ‟

5.1 Figures That Count: As per data sourced from DIPP, the cumulative amount of FDI equity inflows from August 1991 to November 2010 stood at US$ 140.9 billion. India received FDI inflows of US$ 393 million in the financial year 1992-93 which have substantially increased to US$ 25.8 billion in the financial year 2009-10. During the financial year 2010-11 (April-November), FDI equity inflow of US$ 14 billion has already been attracted by India. As on November 2010, the service sector (financial and non-financial) has been the prominent sector staying at the top in terms of FDI inflows standing at 21.07% of the total inflows since the year 2000. Computer software and hardware follows the list with 8.40% share closely followed by telecommunication and housing & real estate at 8.06% and 7.53% respectively. This clearly reflects that the key sectors viz. the service sector, IT, telecommunication and infrastructure which provide attractive profit margins to foreign investors, have attracted greater FDI inflows and the foreign investors have a great opportunity to further participate in India‘s growing economy by investing in these key sectors along with the other strategic areas like defence, insurance , retail etc. Opening up and widening of several important sectors like infrastructure, townships, housing, cash and carry trading, wholesale trading, E-Commerce, single brand retail, commodity exchanges etc. have further spurred the interest in India as the FDI capital of world. More interest is being shown in retail sector which India is gradually opening up. Plans to introduce FDI in multi brand retail seem to be on the horizon. As a result of opening up of several key sectors, substantial investments have been received and this in turn has assisted in re-iterating the India growth story even during the financial turmoil. The key sectors in India have been adequately capitalized and insulated from external jitters of the likes of global slowdown of 2008-09.


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CHAPTER-6 BENEFITS OF FOREIGN DIRECT INVESTMENT AND DISADVANTAGES OF FOREIGN DIRECT INVESTMENT (HOST COUNTRY) There are several benefits of FDI over the economy of the receiving country. These benefits could be classified mainly in four types: Integration into global economy - Developing countries, which invite FDI, can gain access to a wider global and better platform in the world economy. Economic growth - This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country. Trade - Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country. Technology diffusion and knowledge transfer – FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. Developing countries by inviting FDI can introduce world-class technology and technical expertise and processes to their existing working process. Foreign expertise can be an important factor in upgrading the existing technical processes.For example, the civilian nuclear deal led to transfer of nuclear energy know-how between the USA and India. Increased competition - FDI increases the level of competition in the host country. Other companies will also have to improve on their processes and services in order to stay in the market. FDI enhanced the quality of products, services and regulates a particular sector. Linkages and spillover to domestic firms- Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market. Human Resources Development - Employees of the country which is open to FDI get acquaint with globally valued skills. Employment - FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India..


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Disadvantages of Foreign Direct Investment (Host Country)

Foreign direct investment may be very advantageous to the host country that is the country which receives the investment flows in terms of helping the country progress economically and financially. However, foreign direct investment can remain beneficial only when the governments of the host countries put in needed regulations so as to prevent the country from being exploited and used as a profit generating machine for such corporate giants. The past has given many examples of how foreign direct investment can also at times be detrimental to the economy of a country, some examples of which are highlighted below: Political Lobbying: In the past, there have been many instances in which MNCs have resorted to political lobbying in order to get certain policies and laws implemented in their favor. At times, these MNCs are so large that their revenues even exceeded the Gross Domestic Product (GDP) of some smaller nations and compel or threaten them to pass judgments and policies in their favor. Exploitation of Resources: Exploitation of natural resources of a host country is not an very uncommon phenomenon in the case of FDI. MNCs of other countries have been known to indiscriminately exploit the resources of hosts countries in order to get short run gains and profits and have even chosen to ignore the sustainability factors associated with the local communities and local habitat, very much like what happened in the 17th century colonialism. Threaten Small Scale Industries: MNCs have large economic and pricing power due to their large sizes. They do not have much problem with regards to financial capital and can hence resort to using advertising which is a costly affair. Also, these companies are global players who have their operations spread across countries and have effective supply chains which enable them to have economies of scale which smaller players in the domestic market of the host country cannot compete with. All this results in the MNC having cheaper products and more visibility due to the higher amounts of advertising and have been known to push out smaller industries out of business. Technology: Although, the MNCs have access to new and cutting edge technology, they do not transfer the latest technology to the host country with a fear that their home country may loose its competitive advantage, hence the maximum potential of the host economy cannot be achieved as a result of old technology transferred.


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CHAPTER-7 POLICY REFORMS ON FOREIGN DIRECT INVESTMENT IN INDIA FOREIGN DIRECT INVESTMENT IN INDIA Investment in Indian market:India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies .India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No company, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies .India has in the recent years emerged as a favored destination for investment in various sectors like Power generation, Heavy Machinery, Infrastructure project, Telecom, Communication, Software etc. Various hurdles that existed in the economy earlier have been removed as a result of the winds of liberalization sweeping the country. India has now opened its doors to foreign investment in a major way. Non-Resident Indians and Multinational Companies have to follow certain rules and regulations prior to investment. Policy FDI upto 100% is allowed under the automatic route in all activities/sectors except the following which will require approval of the Government: •Activities/items that require an Industrial License; •Proposals in which the foreign collaborator has a previous/existing venture/ tie up in India in the same or allied field, •All proposals relating to acquisition of shares in an existing Indian company by a foreign/NRI investor. •All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in sectoral policy/ sectoral equity cap is notified from time to time through Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. Policy announcement by SIA are subsequently notified by RBI under FEMA.

7.1 REFORMS MADE BY THE GOVERNMENT FOR FDI IN INDIA 1. 2. 3. 4. 5.

Procedure under automatic route Procedure under Government Approval Prohibited Sectors General permission of RBI under FEMA Industrial Licensing


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6. Procedure for obtaining an industrial license 7. Small Scale Sector 8. Locational restrictions 9. Environmental Clearances 10. Foreign currency convertible Bonds 11. Eligibility 12. Preference shares 13. FDI IN EOUs/ SEZs/Industrial Park /EHTP/ STP Special Economic Zones (SEZs) 14. Industrial Park 15. Strong Debt Markets: 16. Strong Deal destination: 17. Robust Insurance Sector: 18. DTAA:

India has among the most liberal and transparent policies on FDI among the emerging economies. FDI up to 100% is allowed under the automatic route in all activities/sectors except the following, which require prior approval of the Government:Sectors prohibited for FDI 1. Activities/items that require an industrial license 2. Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the same field 3. Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (substantial acquisition of shares and takeovers) regulations, 1997 is attracted) 4. All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is not permitted Most of the sectors fall under the automatic route for FDI. In these sectors, investment could be made without approval of the central government. The sectors that are not in the automatic route, investment requires prior approval of the Central Government. The approval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDI is not allowed.

After the grant of approval for FDI by FIPB or for the sectors falling under automatic route, FDI could take place after taking necessary regulatory approvals form the state governments and local authorities for construction of building, water, environmental clearance, etc. Procedure under automatic route FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares of foreign investors.


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Procedure under Government Approval FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of Foreign Investment Promotion Board (FIPB).

Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance. Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion. Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. No fee is payable. The guidelines for consideration of FDI proposals by the FIPB are at Annexure-III of the Manual for FDI. Prohibited Sectors The extant policy does not permit FDI in the following cases: 1. 2. 3. 4. 5.

Gambling and betting Lottery Business Atomic Energy Retail Trading Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations)

General permission of RBI under FEMA Indian companies having foreign investment approval through FIPB route do no require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional Office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs. Industrial Licensing With progressive liberalization and deregulation of the economy, industrial license is required in very few cases. Industrial licenses are regulated under the Industries (Development and Regulation) Act 1951. At present, industrial license is required only for the following: -

1. Industries retained under compulsory licensing K.E.S SHROFF COLLEGE

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2. Manufacture of items reserved for small scale sector by larger units 3. When the proposed location attracts locational restriction The following industries require compulsory license: 1. Alcoholics drinks 2. Cigarettes and tobacco products 3. Electronic aerospace and defense equipment 4. Explosives 5. Hazardous chemicals such as hydrocyanic acid, phosgene, isocynates and di-isocynates of hydro carbon and derivatives Procedure for obtaining an industrial license Industrial license is granted by the Secretariat for Industrial Assistance in Department of Industrial Policy and Promotion, Government of India. Application for industrial license is required to be submitted in Form FC-IL to Department of Industrial Policy and Promotion. Small Scale Sector An industrial undertaking is defined as small scale unit if the capital investment does not exceed Rs. 10 million (approximately $ 222,222). The Government has reserved certain items for exclusive manufacture in the small-scale sector. Non small-scale units can manufacture items reserved for the small-scale sector if they undertake an obligation to export 50% of the production after obtaining an industrial license. Locational restrictions Industrial undertakings to be located within 25 kms of the standard urban area limit of 23 cities having a population of 1 million as per 1991 census require an industrial license. Industrial license even in these cases is not required if a unit is located in an area designated as an industrial area before 1991 or non-polluting industries such as electronics, computer software, printing and other specified industries. Environmental Clearances Entrepreneurs are required to obtain Statutory clearances, relating to Pollution Control and Environment as may be necessary, for setting up an industrial project for 31 categories of industries in terms of Notification S.O. 60(E) dated 27.1.94 as amended from time to time, issued by the Ministry of Environment and Forests under The Environment (Protection) Act 1986. This list includes petrochemicals complexes, petroleum refineries, cement, thermal power, plants, bulk drugs, fertilizers, ,dyes, papers etc.,

However, if investment in the project is less than Rs.1 billion (appox. $ 22.2 million), such Environmental clearance is not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals, asbestos and asbestos products, integrated paint complexes, mining projects, tourism projects of certain parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating industries. Setting up industries in certain locations considered ecologically fragile (e.g. Aravalli Range, coastal areas, Doon Valley, Dahanu etc.) are guided by separate guidelines issues by the Ministry of Environment and Forests.. Foreign currency convertible Bonds FCCBs are issued in accordance with the scheme [the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares


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(Through Depository Receipt Mechanism) Scheme, 1993] and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments; Eligibility The eligibility for issue of Convertible Bonds or Ordinary Shares of Issuing Company is given as under:(i) An issuing company desirous of raising foreign funds by issuing Foreign Currency Convertible Bonds or ordinary shares for equity issues through Global Depositary Receipt(ii) Can issue FCCBs upto USD 50 Million under the Automatic route,(iii) From USD 50 – 100 Million, the companies have to take RBI approval,(iv) From USD 100 Million and above, prior permission of the Department of Economic Affairs is required. Preference shares Foreign investment through preference shares is treated as foreign direct investment. Proposals are processed either through the automatic route or FIPB as the case may be, as per the following guidelines:(i) Foreign investment in preference share are considered as part of share capital and fall outside the External Commercial Borrowing (ECB) guidelines/ cap.

(ii) Preference shares to be treated as foreign direct equity for purpose of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. Preference shares structured without such conversion option fall outside the foreign direct equity cap. (iii) Duration for conversion shall be as per the maximum limit prescribed under the Companies Act or what has been agreed to in the shareholders agreement whichever is less. (iv) The dividend rate would not exceed the limit prescribed by the Ministry of Finance. (v) Issue of preference shares should conform to guidelines prescribed by the SEBI and RBI and other statutory requirements. FDI IN EOUs/ SEZs/Industrial Park /EHTP/ STP Special Economic Zones (SEZs) 100% FDI is permitted under automatic route for setting up of special Economic Zone. Units in SEZ qualify for approval through automatic route subject to sectoral norms. Details about the type of activities permitted are available in the Foreign Trade Policy issued by Department of Commerce. Proposals not covered under the automatic route require approval by FIPB. 100% Export Oriented Units (EOUs) 100% FDI is permitted under automatic route for setting up 100% EOU, subject to sectoral norms. Proposals not covered under the automatic route would be considered and approved by FIPB . Industrial Park 100% FDI is permitted under automatic route for setting up of Industrial Park.


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Strong Debt Markets: A deep liquid debt market in India has been generating consistent and safe returns for offshore investors. Considering the interests of overseas investors, the Government has prescribed high investment limits of USD 20 billion for investments in corporate debt securities and USD 10 billion for investments in government debt securities. Strong Deal destination: India is becoming a hub of both in-bound and out-bound mega M&A deals, private equity transactions and a thriving Venture Capital Industry. Robust Insurance Sector: India has a strong insurance sector with liberal FDI policy permitting FDI of 26% with proposals to raise it upto 49% in the near term. Several private players offer affordable insurance covers and innovative products and the space is being regulated by IRDA, the key statutes being Insurance Act, 1938 and Insurance Regulatory and Development Authority Act, 1999. DTAA: India has entered into double tax avoidance agreements (DTAAs) with all the major jurisdictions in the world providing for liberal provisions to avoid any double taxation on incomes and capital gains and grants exemptions on earnings by foreign investors in India as per the respective treaty provisions. Key jurisdictions used by foreign investors include Mauritius and Singapore which have favourable treaties.


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CHAPTER- 8 FDI AND ITS ROLE IN THE ECONOMIC DEVELOPMENT 1. Foreign direct investment has a major role to play in the economic development of the host country. Over the years, foreign direct investment has helped the economies of the host countries to obtain a launching pad from where they can make further improvements.

2.

3.

4.

5.

6. 7.

8. 9.

This trend has manifested itself in the last twenty years. Any form of foreign direct investment pumps in a lot of capital knowledge and technological resources into the economy of a country. This helps in taking the particular host economy ahead. The fact that the foreign direct investors have been able to play an important role vis-a-vis the economic development of the recipient countries has been due to the fact that these countries have changed their economic stances and have allowed the foreign direct investors to come in and improve their economies It has often been observed that the economically developing as well as underdeveloped countries are dependent on the economically developed countries for financial assistance that would help them to achieve some amount of economical stability. The economically developed countries, on their part, can help these countries financially by investing in these countries. This financial assistance can be channelized into various sectors of the economy. The channelization is normally done on the basis of the requirements of particular sectors. . It has been observed that the foreign direct investment has been able to improve the infrastructural condition of a country. There is ample scope of technological development of a country as well. The standard of living of the general public of the host country could be improved as a result of the foreign direct investment made in a country. The health sector of many a recipient country has been benefited by the foreign direct investment. Thus it may be said that foreign direct investment plays an important role in the overall economic and social development of country FDI has an important impact on country‘s trade balance, increasing labour standards and skills, transfer of technology, skills and the general business climate. FDI also provides an opportunity for technological transfer and up gradation, access to global managerial skills and practices, optimal utilization of human capabilities and natural resources, making industry internationally competitive, opening up export markets, access to international quality goods and services and augmenting employment opportunities. India‘s share in global FDI has increased considerably, but the pace of FDI inflows has been slower than China, Singapore, Brazil, and Russia. Indian economy is largely agriculture based and there is plenty of scope in food processing, agriculture services and agriculture machinery. FDI in this sector should be encouraged.


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10. Research and Development expenditure shows unexpected negative sign. This could be attributed to the fact that R&D sector is not receiving enough FDI as per its requirement. But this sector is gaining more attention in recent years


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CHAPTER-9 ROLE OF FOREIGN DIRECT INVESTMENT IN INDIAN STOCK MARKET The Indian stock markets has increased the development of Indian stock market to many folds. FDI has helped Indian economy to grow, develop and attain financial stability globally. Foreign Direct Investment in India has helped India in overcoming many of the problems which our economy was suffering and in facing the global challenges from the global economy. Money from FDI has helped to boost those sectors of economy which needed financial motivation or boost. Indian stock market has always attracted the world‘s powerful and major investors to come and invest in Indian economy. India has always tried to promote the business environment which is healthy and favourable for foreign investors and provoked them to invest in our Indian economy. Presently, FDI is allowed to invest in financial services which include banking also along with financial sector which does not include banking services. Expanding markets of India from business point of view is attracting large number of foreign investors to put their money in Indian stock market. Indian government is supporting Foreign Direct Investment in India by giving liberty to foreign investors in trade policies. Government is also trying to loosen restrictions on foreign investment which is a benefit for foreign investors and is giving them a golden opportunity to invest in Indian stock market. Technological development in India along with strong telecommunication networks is helping the foreign investors to reap benefits from Indian stock market. There are several benefits of foreign direct investment in Indian stock market which can be listed as: a) India‘s access to global market – a developing country like India is benefitted by inviting FDI as Indian economy got the access to the global market which will help Indian economy to grow at a fast rate. b) Advancement in technology – FDI‘s have the power from which they have the ability to introduce the advanced and world class technology along with its technical knowhow which help Indian economy to progress at a faster rate. Experts from foreign also help in the up gradation of the existing technology in India which helps in saving the cost which would have been incurred if we have opted for the new technology. c) Competition increases – Foreign Direct Invest in Indian stock market has allowed in increasing competition amongst the investors in domestic market. Competition increased due to up gradation of technology and invention of technology in India which acted a major jolt for the Indian economy and has enhanced the chances of growth of Indian economy. FDI‘s have provoked the domestic companies to improve their technology in order to be competitive in the market which is a good sign o development for a developing economy. d) Human resources in India have improved many folds – FDI provides the host country with valuable skills which are used globally and this has upgraded the skill sets of the people of host country by making them more competent and efficient. Biggest disadvantage of Foreign Direct K.E.S SHROFF COLLEGE

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Investment in Indian stock market is that it is increasing the aggregate demand for short run, the day foreign investors will start recovering their investment which they invested in initial outlay, and our economy will suffer to a very large extent. If the FDI schedule is not healthy it will affect the capital flow our country. All the FDI‘s come with a vie w to earn high return on investment; if foreign investors come with this motive they will actually hamper the Indian economy in long run.


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CHAPTER-10 GUIDELINES FOR FDI IN BANKING

In the private banking sector of India, FDI is allowed up to a maximum limit of 74 % of the paidup capital of the bank. On the other hand, Foreign Direct Investment and Portfolio Investment in the public or nationalized banks in India are subjected to a limit of 20 % in totality. This ceiling is also applicable to the investments in the State Bank of India and its associate banks. FDI limits in the banking sector of India were increased with the aim to bring in more FDI inflows in the country along with the incorporation of advanced technology and management practices. The objective was to make the Indian banking sector more competitive. The Reserve Bank of India governs the investment matters in the banking sector. According to the guidelines for FDI in banking sector, Indian operations by foreign banks can be executed by any one of the following three channels:Branches in India Wholly owned subsidiaries. Other subsidiaries. In case of wholly owned subsidiaries (WOS), the guidelines for FDI in the banking sector specified that the WOS must involve a capital of minimum ` 300 crores and should ensure proper corporate governance.   

10.1 Problems faced by the Indian banking sector FDI in Indian banking sector resolves the following problems often faced by various banks in the country: Inefficiency in management Instability in financial matters Innovativeness in financial products or schemes Technical developments happening across various foreign markets Non-performing areas or properties Poor marketing strategies Changing financial market conditions 10.2 Benefits of FDI in banking sector in India:Transfer of technology from overseas countries to the domestic market Ensure better and improved risk management in the banking sector Assures better capitalization Offers financial stability in the banking sector in India


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CHAPTER-11 SECTOR WISE DISTRIBUTION OF FDI INFLOWS IN INDIA


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Manufacturing sector nd  India ranks 2 most favored destination for foreign investments after China.  India ranks among the top 12 producers of manufacturing value added (MVA). th  In textiles, the country is ranked 4 after China, USA and Italy. th  Ranked 5 in electrical machinery and apparatus. th  6 position in the basic metals category th  7 in chemicals and chemical products th  10 in leather, leather products, refined petroleum products and nucle ar fuel th  12 in machinery and equipment and motor vehicles. SERVICE SECTOR  India's large service industry accounts for more than 50% of the country's GDP.  Attracted $3.12 billion FDI in the first seven months of 2009-10  22 per cent of the total FDI inflows of $17.64 billion in the April-October for service

sector  In 2008-09, attracted the maximum FDI worth USD 6.11 billion

Current issues with FDI in Services Sector  Very weak linkages of service sector with the Indian economy (only few cities).


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 Requires highly skilled workers.  Employee Welfare in time of crisis.

FDI IN RETAIL- ADVANTAGES  Generates huge employment  Increased investment in technology  The huge tax revenue generated.  The consumer gains from the wide variety of choices and a more diversified basket.

FDI IN RETAIL-DRAWBACKS  Foreign Players would displace the unorganized retailers because of their superior

financial strengths.  The entry of large global retailers such as Wal-Mart would kill local shops and millions

of jobs.  Increase in real estate prices and marginalize domestic entrepreneurs

TRADING SECTOR  This sector shows an exponential rise in inflows from 2006 onwards.  Total numbers of 20 technical and 1111 financial collaborations have been approved

since 2005.  Trading for wholesale received highest percentage (84.25%) of total FDI inflow followed

by trading (for exports) with 9.04%, e-commerce with (2.38%) during 20 06-08 2008. CONSULTANCY SECTOR  Consultancy Sector received US$ 1.1 bn which is 1.14% of total inflows received since

2008.  Mumbai (38.76%) and New Delhi (13.01%) received major percentages of inflow .  Out of the 125 technology transfers, 40 technical collaborations are approved with USA,

21 with UK, and 14 with Germany. EDUCATION SECTOR  100% FDI is allowed in education sector.  India with the added advantage of having large pool of skilled people with secondary and

tertiary level of education attracts foreign firms in science, R & D, and high technology products and services. K.E.S SHROFF COLLEGE

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CONSTRUCTION SECTOR  The amount of FDI till Dec. 2008 is US$ 4.9 billion which is 6.15% of the total inflows

received .  In India Delhi, Mumbai, and Hyderabad receives maximum amount (viz. US$ 1245.61,

1000.5, and 943.22 billion) of investment.  Out of the total technology transfers ,9 technical and 223 financial collaborations have

been approved till December 2008 AUTOMOBILE INDUSTRY  FDI inflows during Jan 2005 to Dec. 2009 is US$ 3.2 billion which is 4.09% of the total

inflows received.  It ranks 5th in the list of sectors in terms of cumulative FDI approved from August 1991

to Dec 2008.  In India Mumbai, New Delhi and Ahmedabad received major chunks of investment i.e.

36.98%, 26.63% and 9.47%). COMPUTER HARDWARE AND SOFTWARE  This industry fetched 3636 numbers of foreign collaborations out of which, 125 are

technical and 3511 are financial in nature.  Also it received US$ 8.9 billion which constitute 11.43% of the total FDI inflows during

the period during 2005-2007.  Among Indian locations Mumbai received 22.44% of investment followed by Bangalore

(10.8%), and Chennai (9.90%).

TELECOMMUNICATION SECTOR nd

 Telecommunication sector ranks 2 



in the list of sectors in terms of cumulative FDI.

Out of cumulative FDI inflows , this Sector received an inflow of US$ 8.2 billion, which is 8.4% of the total FDI inflows during last few years. New Delhi attracts highest percentage (32.58%) of FDI inflows after 2005


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11.1 INDIAN SECTORS ATTRACTING HIGHEST FDI INFLOWS OVERVIEW:Indian Sectors Attracting Highest FDI Inflows are service, chemicals, food processing and telecommunications. FDI inflows to different sectors in India have increased over the years. Foreign direct investment in INDIA. Foreign direct investment can increase the economic growth of a country and the government of India realized this fact and this is the reason that it started a series of financial and economic reforms in the country in 1991. In 2003, the Indian government started the second generation reforms in order to increase the flow of foreign direct investment in the country which in turn, helped to integrate the country's economy with the economy of the world. Sectors In INDIA That Are Attracting The Highest Amount Of FDI Indian Sectors Attracting Highest FDI Inflows are many such as, electrical equipments, transportation industries, telecommunication, fuels, food processing industries, and services.

Further the Indian Sectors Attracting Highest FDI Inflows are cement and gypsum products, metallurgical industries, chemicals, and drugs and pharmaceuticals Amount of Foreign Direct Investment In The Major Sectors of India From August, 1991 To September, 2005: 

The amount of foreign direct investment in the sector of electrical equipments was US$ 4,266 million


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  



 

 



Foreign direct investment in the sector of transportation industry was US$ 3,070 million FDI in the service sector was US$ 2,840 million The amount of foreign direct investment in the sector of telecommunications stood at US$ 2,730 million The amount of foreign direct investment in the sector of fuels that included oil refinery and power came to US$ 2,505 million Foreign direct investment in the sector of chemicals was US$ 1,818 million The amount of foreign direct investment in the sector of food processing industries came to US$ 1,172 million FDI to drugs and pharmaceuticals was US$ 936 million The amount of foreign direct investment in the sector of cement and gypsum products came to US$ 715 million Foreign direct investment in the sector of metallurgical industries was US$ 544 million

.


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11.2 FDI Top 10 Sectors Attracting Highest FDI Equity Inflows:

Ranks

Cumulative % age to 2009-10 2010-11 ( 2011-12 total Inflows (AprilApril(AprilInflows (April 00 March) March) Jan.) (In terms Jan. 12) of US$)

Sector

‟

‟

1

SERVICES SECTOR (financial & non-financial)

19,945 (4,176)

15,053 (3,296)

22,771 (4,836)

143,878 (31,971)

20.00%

2

TELECOMMUNICATIONS (radio paging, cellular mobile, basic telephone services)

12,270 (2,539)

7,542 (1,665)

8,984 (1,992)

57,050 (12,547)

8.00%

3

COMPUTER SOFTWARE & HARDWARE

4,127 (872)

3,551 (780)

3,312 (698)

49,626 (11,107)

7.00%

4

HOUSING & REAL ESTATE

14,027 (2,935)

5,600 (1,227)

2,750 (591)

49,025 (10,973)

7.00%

5

CONSTRUCTION ACTIVITIES (including roads & highways)

13,469 (2,852)

4,979 (1,103)

10,859 (2,230)

49,440 (10,867)

7.00%

6

DRUGS PHARMACEUTICALS

1,006 (213)

961 (209)

14,482 (3,208)

42,745 (9,170)

6.00%

6

POWER

6,138 (1,272)

5,796 (1,272)

7,262 (1,569)

32,798 (7,215)

5.00%

7

AUTOMOBILE INDUSTRY

5,893 (1,236)

5,864 (1,299)

2,916 (635)

29,354 (6,470)

4.00%

8

METALLURGICAL INDUSTRIES

1,999 (420)

5,023 (1,098)

7,700 (1,655)

26,287 (5,909)

4.00%

9

PETROLEUM & NATURAL GAS

1,297 (266)

2,543 (556)

951 (202)

14,612 (3,339)

2.00%


&

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11.3 Percentage of FDI Allowed In Different Sectors - 74%Banking - 74% -banking financial companies (stock broking, credit cards, financial - 100%etc.) - 100% - 26%Insurance - 26% - 74% Telecommunications - 74% - 100%Private petrol refining - 100% - 100%Construction development - 100% gnite - 74%Coal & lignite - 74% - 51% Trading - 51% - 100%Electricity - 100% - 100%Pharmaceuticals - 100% - 100 %

consulting,,etc.)

Tourism - 100% - 74%Mining - 74% - 100%Advertising - 100% - 74%Airports - 74% - 100%Films - 100% - 49%Domestic airlines - 49% - 100%Mass transit - 100% - 100%Pollution control - 100% - 26% for newspapers and current events, 100 % for scientific and technical l periodicals


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CHAPTER-12 FOREIGN INSTITUTIONAL INVESTORS 12.1 Introduction of foreign institutional investors  An institution established outside India, which invests in securities traded on the

markets in India e.g.  Pension Funds  Mutual Funds  Investment Trust  Insurance companies  Endowment Funds  University Funds  Foundations or Charitable Trusts  Asset Management Companies  Power of Attorney Holders  Bank

 Foreign Institutional Investors (FII)  FIIs may invest in:  securities in the primary and secondary markets (shares, debentures, warrants of

listed and unlisted companies)  units issued by domestic mutual funds  dated Government securities  derivatives traded on a recognized stock exchange  commercial paper  debt instruments – provided a 70/30 equity/debt ratio is maintained


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 Foreign Institutional Investors (FII) Limits on the type and amount of

investments apply to FIIs  no more than 10% of the equity in any one company  no more than 10% in the equity in any one company on behalf of a fund sub-

account  no more than 5% in the equity in any one company on behalf of a

corporate/individual sub-account  no more than 24% in the aggregate of the total issued capital of a company to be

held by FIIs

12.2 Investment by FIIs under Portfolio Investment Scheme The RBI has given general permission to SEBI-registered FIIs/sub-accounts to invest under the Portfolio Investment Scheme (PIS). • The total holding of each FII/sub-account under this scheme should not exceed 10 percent of the total paidup capital or 10 percent of the paid-up value of each series of convertible debentures issued by the Indian company. • The total holding of all the FIIs/sub -accounts put together should not exceed 24 percent of the paid-up capital or the paid-up value of each series of convertible debentures. This limit of 24 percent can be increased to the sectoral cap/statutory limit as applicable to the Indian company concerned, by passing a resolution of its Board of Directors, followed by a special resolution to that effect by its General Bod y. • A domestic asset management company or portfolio manager who is registered with the SEBI as an FII for managing the funds of a sub-account can make investments under the scheme on behalf of: a person resident outside India who is a citizen of a foreign state; or a corporate body registered outside India. • However, such investment should be made out of the funds raised, collected, or brought from outside through a normal banking channel. The investments by such entities should not exceed 5 percent of the total paid-up equity capital or 5 percent of the paid-up value of each series of convertible debentures issued by an Indian company, and should also not exceed the overall ceiling speciﬁed or FIIs.


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CHAPTER-13 DIFFERENCE BETWEEN FDI AND FII FDI vs FII Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. On the contrary, FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation. In FII, the companies only need to get registered in the stock exchange to make investments. But FDI is quite different from it as they invest in a fore ign nation. The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. In simple words, FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. This difference is what makes nations to choose FDI‘s more than then FIIs FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign investment for the whole economy. Foreign Direct Investment only targets a specific enterprise. It aims to increase the enterprises capacity or productivity or change its management control. In an FDI, the capital inflow is translated into additional production. The FII investment flows only into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. FDI not only brings in capital but also helps in good governance practises and better management skills and even technology transfer. Though the Foreign Institutional Investor helps in promoting good governance and improving accounting, it does not come out with any other benefits of the FDI. While the FDI flows into the primary market, the FII flows into secondary market. While FIIs are short-term investments, the FDI‘s are long term.


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CHAPTER-14 DEPOSITORY RECEIPTS Depository receipts is a negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, which is issued by a foreign publicly listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries. One of the most common types of DRs is the American depository receipt (ADR), which has been offering companies, investors and traders global investments opportunities since the 1920s. Since then, DRs have spread to other parts of globe in the form of global depository receipts (GDRs), European DRs and international DR‘s. ADRs are typically traded on a u.s. national stock exchange, such as the New York Stock Exchange (NYSE) or the American stock exchange, while GDRs are commonly listed on European stock exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually denominated in U.S. dollars, but can also be denominated in euros. Now depository receipts are very popular and foreign firms go to the U.S.A or European market, issue shares to depository. Depository makes a public issue and gets funds from the investors. Funds are made available to the issuing firm (called as ‗sponsor‘).depository receipts are issued to the investors. These receipts are listed and traded on the stock exchange (in U.S .A or in europe, wherever). Each DR is issued by a domestic depositary bank when the underlying shares are deposited in a foreign custodian bank, usually by a broker who has purchased the shares in the open market local to the foreign company. A DR can represent a fraction of a share, a single share, or multiple shares of a foreign security. The holder of a DR has the right to obtain the underlying foreign security that the DR represents, but investors usually find it more convenient to own the DR. The price of a DR generally tracks the price of the foreign security in its home market, adjusted for the ratio of DRs to foreign company shares. In the case of companies domiciled in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT)charge by the UK government. Depositary banks have various responsibilities to DR holders and to the issuing foreign company the DR represents.


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CHAPTER-15 GLOBAL DEPOSITORY RECEIPTS A global depository receipt or global depositary receipt (GDR) is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. Global depository receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets. Prices of global depositary receipt are often close to values of related shares, but they are traded and settled independently of the underlying share. Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York. GDRs are often listed in the Frankfurt Stock Exchange, Luxembourg Stock Exchange and in the London Stock Exchange, where they are traded on the International Order Book (IOB). Normally 1 GDR = 10 Shares, but not always. It is a negotiable instrument which is denominated in some freely convertible currency. It is a negotiable certificate denominated in US dollars which represents a non -US Company's publicly traded local equity. Global Depository Receipt (GDR) - certificate issued by international bank, which can be subject of worldwide circulation on capital markets. GDR‘s are emitted by banks, which purchase shares of foreign companies and deposit it on the accounts. Global Depository Receipt facilitates trade of shares, especially those from emerging markets. Prices of GDR‘s are often close to values of related shares. GDRs are securities available in one or more markets outside the company‘s home country. The basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to raise capital on two or more markets simultaneously, which increases his shareholder base. They gained popularity also due to the flexibility of their structure. GDRs are typically denominated in USD, but can also be denominated in Euros. GDRs are commonly listed on European stock exchanges such as the London stock exchange(LSE)or Luxembourg Stock Exchange, or quoted on SEAQ (Stock Exchange Automated Quotations)Inter national, and traded at two other places besides the place of listing, e.g. On the OTC Market in London and on the private placement market in the US..


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15.1 Issue Process Of GDR‘s 1. To find the Depository bank Depository bank has only right to issue the GDRs. So, it is necessary to find depository bank in USA and other European countries. 2. Issue the Shares to Depository bank Shares cannot be issued to foreign investors. But shares are issued to depository bank and depository bank will accept the shares of Indian companies as the custodian of foreign investors. 3. Deposit the fees For issuing GDRs, either investors or Company has to deposit the fees for issuing the certificate named global depository receipt. 4. Issue of GDRs and Record Depository bank has right to issue one GDR certificate for 2 to 10 shares. The issue of GDRs to those investors who will pay the amount of shares of Indian companies. After this, it will be assumed that USA or other foreign countries' investors have acquired the shares of Indian companies. Indian company gets money of shares through depository banks. On the other side, foreign investors' name registered and they will get dividend through this bank in USA Dollar. Not only Indian companies but many other developing countries' companies are using same procedure for getting fund through GDRs. This year, a Kuwaiti investment company successfully issued shares in the form of Global Depository Receipts (GDRs) to foreign investors. After issuing GDRs, these shares can deal in any foreign stock exchange and GDRs will be one of the security type in stock exchange list of stocks.


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15.2 How GDRs are traded A GDR holder can sell in two ways: • The GDR can be sold to another investor in the market in which the GDR trades. This is known as an intra-market transaction, and will be settled in the same way as any other security purchase in that market. • The GDR can be cancelled and the underlying shares can be sold to a foreign investor through a cross-border transaction. In this case, the GDR certificate would be surrendered to the depositary bank. The shares held with the local custodian bank would be released back into the home market of the company whose shares are being released, and sold to a broker there. Furthermore, the GDR holder would be able to request delivery of the actual shares at any time. This exchange facility – i.e. the ability to exchange the GDRs for the shares they represent in their home market – is important because it ensures a price linkage between the two markets. Price differentials between the two markets do occur, but the exchange facility provides a channel whereby some price equilibrium can be reintroduced between the two markets, and the continuous buying and selling of GDRs in either market tends to keep the price differential between the two markets to a minimum.

15.3 Advantages Of GLOBAL DEPOSITORY RECEIPTS Benefits to a Company

Currently, there are over 2,000 Depositary Receipt programs for companies from over 70 countries. The establishment of a Depositary Receipt program offers numerous advantages to non-U.S.companies. The primary reasons to establish a Depositary Receipt program can be divided into two broad considerations: capital and commercial. Advantages may include: 







Expanded market share through broadened and more diversified investor exposure with potentially greater liquidity, which may increase or stabilize the share price. Enhanced visibility and image for the company's products, services and financial instruments in a marketplace outside its home country. Flexible mechanism for raising capital and a vehicle or currency for mergers and acquisitions. Enables employees of U.S. subsidiaries of non-U.S. companies to invest more easily in the parent company.

Benefits to an Investor

Increasingly, investors aim to diversify their portfolios internationally. However, obstacles such as undependable settlements, costly currency conversions, unreliable custody services, poor information flow, unfamiliar market practices, confusing tax conventions and internal investment


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policy may discourage institutions and private investors from venturing outside their local market. Depositary Receipt advantages may include:  



 



Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars. Diversification without many of the obstacles that mutual funds, pension funds and other institutions may have in purchasing and holding securities outside of their local market. Elimination of global custodian safekeeping charges, potentially saving Depositary Receipt investors up to 10 to 40 basis points annually. Familiar trade, clearance and settlement procedures. Competitive U.S. dollar/foreign exchange rate conversions for dividends and other cash distributions. Ability to acquire the underlying securities directly upon cancellation.

15.4 DISADVANTAGES OF GLOBAL DEPOSITORY RECEIPTS Despite the disadvantages related to investing in foreign companies such as political risk and economic risk, there are specific disadvantages related to depository receipts that affect mainly investors. 1. Dividend distribution. Dividends distributed by foreign companies are not directly distributed to the Domestic Receipts' holders rather, a percentage is deducted as commission for the depository bank. That makes Depository Receipts have a lower value relative to the original stock. 2. Currency risk. Although Domestic Receipts are traded and quoted in terms of the domestic currency, dividends are declared in terms of the foreign currency which makes the return on the investment volatile and therefore risky. 3. Double taxation. This risk occurs when the home country of the issuing company and the home country of the Domestic Receipts' holders do not have a treaty to eliminate double taxation. Comparing the advantages and the disadvantages of Depository Receipts, and Especially. Global Depository Receipts depends on the conditions of the offer made by the issuing company because as we have indicated it is so flexible and each case should be studied apart to evaluate its attractiveness


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CHAPTER-16 AMERICAN DEPOSITORY RECEIPT An American depositary receipt (ADR) is a negotiable security that represents securities of a non-US company that trade in the US financial markets. Securities of a foreign company that are represented by an ADR are called American depositary shares (ADSs). Shares of many non-US companies trade on US stock exchanges through ADRs. ADRs are denominated and pay dividends in US dollars and may be traded like regular shares of stock. Over-the-counter ADRs may only trade in extended hours. The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges. The stock of many non-US companies trade on US exchanges through the use of ADRs. ADRs enable US investors to buy shares in foreign companies without undertaking cross-border transactions. The shares of the non-US corporation trade on a non-US exchange, while the ADRs trade on a US exchange. ADRs are one type of depositary receipt (DR), which is any negotiable securities that represents securities of companies that is foreign to the market on which the DR trades. DRs enable domestic investors to buy securities of foreign companies without the accompanying risks or inconveniences of cross-border and cross-currency transactions. This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq as well as OTC.

ADR RATIO Single

1 ADR = 1 SHARE ADR Ratio = 1:1 • Multiple 1 ADR = 5 SHARES ADR Ratio = 1:5 • Fraction 1 ADR = ½ SHARE ADR Ratio = 2:1


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16.1 PROCEDURE AND MECHANISM OF ISSUING ADR‘S ADR‘S are issued by a US bank, such as J.P. Morgan or the bank of New York, which functions as a depository, or stock transfer and issuing agent for the ADR program. The foreign, or local shares, remain on deposit with the depository‘s custodian issuer‘s home market. Each ADR is backed by a specific number of an issuer‘s local shares (e.g. one ADR representing one share, one ADR representing ten shares, etc.) This is the ADR ratio, which is designed to set the price of each ADR in US dollars. •Financial information, including annual reports and proxies are delivered to US holders on a consistent basis by the Depositary. The dividends are conv erted into dollars and paid to ADR holders by the Depositary.

16.2 How Does ADR Work? Let us take Infosys example – trades on the Indian stock at around Rs.2000/•This is equivalent to US$ 40 – assume for simplicity •Now a US bank purchases 10000 shares of Infosys and issues them in US in the r atio of 10:1 •This means each ADR purchased is worth 10 Infosys shares. •Quick calculation means 1 ADR = US $400 •Once ADR are priced and sold, its subsequent price is determined by supply and demand factors, like any ordinary shares.

16.3 TYPES OF ADR‘S When a company establishes an ADR program, it must decide what exactly it wants out of the program, and how much time, effort, and other resources they are willing to commit. For this reason, there are different types of programs, or facilities, that a company can choose. TYPES of ADR: Unsponsored ADR Sponsored ADR Level 1 Level 2 Level 3 Unsponsored ADRs Unsponsored shares trade on the over-the-counter (OTC) market. These shares are issued in accordance with market demand, and the foreign company has no formal agreement with a


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depositary bank. Unsponsored ADRs are often issued by more than one depositary bank. Each depositary services only the ADRs it has issued. As a result of an SEC rule change effective October 2008, hundreds of new ADRs have been issued, both sponsored and unsponsored. The majority of these were unsponsored Level I ADRs, and now approximately half of all ADR programs in existence are unsponsored. Sponsored Level I ADRs ("OTC" facility) Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued. When a company issues sponsored ADRs, it has one designated depositary who also acts as its transfer agent. A majority of American depositary receipt programs currently trading are issued through a Level 1 program. This is the most convenient wa y for a foreign company to have its equity traded in the United States. Level 1 shares can only be traded on the OTC market and the company has minimal reporting requirements with the U.S. Securities and Exchange Commission (SEC). The company is not required to issue quarterly or annual reports in compliance with U.S. GAAP. However, the company must have a security listed on one or more stock exchange in a foreign jurisdiction and must publish in English on its website its annual report in the form required by the laws of the country of incorporation, organization or domicile. Companies with shares trading under a Level 1 program may decide to upgrade their program to a Level 2 or Level 3 program for better exposure in the United States markets. Sponsored Level II ADRs ("Listing" facility) Level 2 depositary receipt programs are more complicated for a foreign company. When a foreign company wants to set up a Level 2 program, it must file a registration statement with the U.S. SEC and is under SEC regulation. In addition, the company is required to file a Form 20F annually. Form 20-F is the basic equivalent of an annual report (Form 10-K) for a U.S. company. In their filings, the company is required to follow U.S. GAAP standards or IFRS as published by the IASB. The advantage that the company has by upgrading their program to Level 2 is that the shares can be listed on a U.S. stock exchange. These exchanges include the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX). While listed on these exchanges, the company must meet the exchange‘s listing requirements. If it fails to do so, it may be delisted and forced to downgrade its ADR program.

Sponsored Level III ADRs ("offering" facility) A Level 3 American Depositary Receipt program is the highest level a foreign compan y can sponsor. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by U.S. companies. Setting up a Level 3 program means that the foreign company is not only taking steps to permit shares from its home market to be deposited into an ADR program and traded in the U.S.; it is K.E.S SHROFF COLLEGE

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actually issuing shares to raise capital. In accordance with this o ffering, the company is required to file a Form F-1, which is the format for an Offering Prospectus for the shares. They also must file a Form 20-F annually and must adhere to U.S. GAAP standards or IFRS as published by the IASB. In addition, any material information given to shareholders in the home market, must be filed with the SEC through Form 6K. Foreign companies with Level 3 programs will often issue materials that are more informative and are more accommodating to their U.S. shareholders because they rely on them for capital. Overall, foreign companies with a Level 3 program set up are the easiest on which to find information. Examples include the British telecommunications company Vodafone (VOD), the Brazilian oil company Petrobras (PBR), and the Chinese technology company China Information Technology, Inc. (CNIT). Restricted Programs Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program. There are two SEC rules that allow this type of issuance of shares in the U.S.: Rule 144-A and Regulation S. ADR programs operating under one of these 2 rules make up approximately 30% of all issued ADRs. Privately placed (SEC Rule 144A) ADRs Some foreign companies will set up an ADR program under SEC Rule 144A. This provision makes the issuance of shares a private placement. Shares of companies registered under Rule 144-A are restricted stock and may only be issued to or traded by Qualified Institutional Buyers (QIBs). US public shareholders are generally not permitted to invest in these ADR programs, and most are held exclusively through the Depository Trust & Clearing Corporation, so there is often very little information on these companies. Offshore (SEC Regulation S) ADRs The other way to restrict the trading of depositary shares to US public investors is to issue them under the terms of SEC Regulation S. This regulation means that the shares are not, and will not be registered with any United States securities regulation authority. Regulation S shares cannot be held or traded by any ―U.S. person‖ as defined by SEC Regulation S rules. The shares are registered and issued to offshore, non-US residents.

Regulation S ADRs can be merged into a Level 1 program after the restriction period has expired, and the foreign issuer elects to do this. Sourcing ADRs One can either source new ADRs by depositing the corresponding domestic shares of the company with the depositary bank that administers the ADR program or, instead, one can obtain existing ADRs in the secondary market. The latter can be achieved either by purchasing the ADRs on a US stock exchange or via purchasing the underlying domestic shares of the company on their primary exchange and then swapping them for ADRs; these swaps are K.E.S SHROFF COLLEGE

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called cross book swaps and on many occasions account for the bulk of ADR secondary trading. This is especially true in the case of trading in ADRs of UK companies where creation of new ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government; sourcing existing ADRs in the secondary market (either via cross book swaps or on exchange) instead is not subject to SDRT. 16.4 RISKS IN VOLVED IN ISSUING ADR’S ADRs' Special Risks

Of course, even though they trade in US dollars and can, at least on the surface, closely mimic the look and feel of American stocks, ADRs come with their own set of special considerations to keep in mind. Currency risk: If the value of the US dollar rises against the value of the company's home currency, a good deal of the company's intrinsic profits might be wiped out in translation. Conversely, if the US dollar weakens against the company's home currency, any profits it makes will be enhanced for a US owner. For more information on how this could damage or inflate your results, read The Danger of Investing in International Bonds. Political risk: ADR status does not insulate a company's stock from the inherent risk of its home country's political stability. Revolution, nationalization, currency collapse or other potential disasters may be greater risk factors in other parts of the world than in the US, and those risks will be clearly translated through any ADR that originates in an affected nation. Inflation risk: Countries around the globe may be more, or less, prone to inflation than the US economy is at any given time. Those with higher inflation rates may find it more difficult to post profits to an US owner, regardless of the company's underlying health.

In other words, ADRs are just what they seem: a representation of a foreign stock, rather than an actual holding in the company. Because of all of the considerations listed above, an ADR of a foreign company in the US. may trade a little ahead or a little behind the price the company commands in its own currency in its own home base. But it's safe to say that buying an ADR is the closest an American investor can come to participating directly in the rest of the world's economy.


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16.5 INDIAN COMPANIES USING ADR/GDR COMPANY Bajaj Auto Dr. Reddys HDFC Bank Hindalco ICICI Bank

ADR No Yes Yes No Yes

GDR Yes Yes Yes Yes Yes

Infosys Technologies ITC L&T MTNL Patni Computers Ranbaxy Laboratories Tata Motors State Bank of India VSNL WIPRO

Yes No No Yes Yes No Yes No Yes Yes

Yes Yes Yes Yes No Yes No Yes Yes Yes


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CHAPTER-17 INDIAN DEPOSITORY RECEIPTS An Indian Depository Receipt is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets. The foreign company IDRs will deposit shares to an Indian depository. The depository would issue receipts to investors in India against these shares. The benefit of the underlying shares (like bonus, dividends etc.) would accrue to the depository receipt holders in India. The Ministry of Corporate Affairs of the Government of India, in exercise of powers available with it under section 642 read with section 605A had prescribed the Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) vide notification number GSR 131(E) dated February 23, 2004. Standard Chartered PLC became the first global company to file for an issue of Indian depository receipts in India.[2] The rules provide inter alia for (a) Eligibility for issue of IDRs (b) Procedure for making an issue of IDRs (c) Other conditions for the issue of IDRs (d) Registration of documents (e) Conditions for the issue of prospectus and application (f) Listing of Indian Depository Receipts (g) Procedure for transfer and redemption (h) Continuous Disclosure Requirements (i) Distribution of corporate benefits. These rules (―principal rules‖) were operationalised by the Securities and Exchange Board of India (SEBI) — the Indian markets regulator in 2006. Operation instructions under the Foreign Exchange Management Act were issued by the Reserve Bank of India on July 22, 2009.[3] The SEBI has been notifying amendments to these guidelines from time to time.

17.1 ELIGIBILITY OF COMPANIES TO ISSUE IDR‘S The regulations relating to the issue of IDRs is contained in Securities and Exchange Board of India (Issue of capital and disclosure requirements) Regulations, 2009, as revised from time to time.[4] According to Clause 26 in Chapter III (―Provisions as to public issue‖), the following are required of any company intending to make a public issue in India: 





it has net tangible assets of at least Indian rupee three crore in each of the preceding three full years (of twelve months each), of which not more than fifty per cent are held in monetary assets: Provided that if more than fifty per cent. of the net tangible assets are held in monetary assets, the issuer has made firm commitments to utilise such excess monetary assets in its business or project; it has a track record of distributable profits in terms of section 205 of the Companies Act, 1956, for at least three out of the immediately preceding five years: Provided that extraordinary items shall not be considered for calculating distributable profits; it has a net worth of at least INR one crore in each of the preceding three full years (of twelve months each);


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



the aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year; if it has changed its name within the last one year, at least fifty per cent. of the revenue for the preceding one full year has been earned by it from the activity indicated by the new name.

. 17.2 IDR ISSUE PROCESS According to SEBI guidelines, IDRs will be issued to Indian residents in the same way as domestic shares are issued. The issuer company will make a public offer in India, and residents can bid in exactly the same format and method as they bid for Indian shares. The issue process is exactly the same: the company will file a Draft red herring prospectus (DRHP), which will be examined by SEBI. The general body of investors will get a chance to read and review the DRHP as it is a public document, available on the websites of SEBI and the book running lead managers. After SEBI gives its clearance, the company sets the issue dates and files the document with the Registrar of Companies. In the next step, after getting the Registrar‘s registration ticket, the company can go ahead with marketing the issue. The issue will be kept open for a fixed number of days, and investors can submit their application forms at the bidding centers. The investors will bid within the price band and the final price will be decided post the closure of the Issue. The receipts will be allotted to the investors in their demat account as is done for equity shares in any public issue. On 256th October 2010, SEBI notified the framework for rights issue of Indian Depository Receipts (IDRs). Disclosure requirement for IDR rights would more or less be in line with the reduced requirement applicable for domestic rights issue. . 17.3 ELIGIBILITY FOR INVESTORS According to SEBI guidelines, the minimum bid amount in an IDR issue is Rs 20,000 per applicant. Like in any public issue in India, resident Indian retail (individual) investors can apply up to an amount of INR 2,00,000 and Non-institutional investors (also called high net worth individuals) can apply above INR 1,00,000 but up to applicable limits. 17.4 RESERVATIONS IN IDR ISSUES According to current regulations, at least 50% of the Issue is to be allocated to qualified Institutional Buyers (QIBs), 30% of the issue to the retail individual investors and balance 20% of the issue to non-institutional investors and employees. The ratio of non-institutional investors and employees is at the discretion of the company to decide. The issue will fail if the company does not get QIB investors to the extent of 50% of the issue size.


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17.5 CASE STUDY:-STANDARD CHARTERED PLC SETS INDIAN DEPOSITORY RECEIPT Standard Chartered plc is the first foreign company to have publicly elicited interest in making an IDR issue in India. The company is already listed on the London and Hong Kong stock Exchanges. Standard Chartered CEO Peter Sands is quoted in the Indian media as saying the "IDR listing (is) to enhance StanChart's commitment to India. Recent news reports suggest Standard Chartered PLC may be inching closer to an issue. "We have already got advisors and we will file for the IDR issue after our (India) results are published by March-end," said Neeraj Swaroop, Regional Chief Executive, India and South Asia of Standard Chartered. Patrick Hosking, financial editor of the Times reports that Standard Chartered (may) offer up to $750 million of new shares to Indians. But India‘s top financial portal reported top officials as suggesting the amount could be anywhere between $500 million and $750 million. Follow up to earlier reports cited, Standard Chartered Plc files DRHP to issue IDRs in India with SEBI on March 30, 2010. Standard Chartered Bank is set to become the first foreign company to list in India through an Indian depository receipts (IDR) issue. StanChart expects to raise around $500 – 750 million (Rs 2,250-3375 crore) to grow its businesses globally. Standard Chartered opened its IDR offering to Indian investors on May 25, 2010, as reported by BBC News. The price band for the offering is 100 (£1.47; $2.10) to 115 rupees per IDR. The bank, which makes most of its profits in Asia, will issue 240 million IDRs through the offer. In an interview with NDTV India, Neeraj Swaroop, CEO - South Asia at Standard Chartered Bank, said that the decision to list in India through an Indian depository receipts (IDR) issue, was not about raising capital but it is about a message of commitment to India. Standard Chartered fixed its issue price for Indian Depository Receipts at Rs 104 per unit . [14] At this issue price, the bank will raise Rs. 2,490 crore ($530 million) by selling 24 crore IDRs. Every 10 IDRs represents one share of the bank. The IDRs opened at the Bombay Stock Exchange and National Stock Exchange on June 11. Standard Chartered PLC‘s Indian Depository Receipt, listed at Rs 106, exceeded expectations by Rs 2 or 1.92 per cent on the National Stock Exchange. Problem faced by the Standard Chartered PLC’s

Problems faced by Standard Chartered during the issue as are given below: 1 ) The pricing and price movement in IDRs was directly linked to the share price of StanChart in the London Stock Exchange; this led to apprehension because any slowdown in the European economy would in turn affect the valuation of the bank, which would hamper its price movement in IDRs.


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2 ) The two risks faced by StanChart were: • Interest rate risk due to short term borrowing to fund long term assets; and • Currency risk due to the strengthening of the US Dollar vis -à-vis local currencies in the countries of its presence.

17.7 Advantages of the IDR Benefits to the Issuing Company    

It provides access to a large pool of capital to the issuing capita It gives brand recognition in India to the issuing company It facilitates acquisitions in India Provides an exit route for existing shareholders

Benefits to Investors    

It provides portfolio diversification to the investor It gives the facility of ease of investment There is no need to know your customer norms. No resident Indian individual can hold more than $200,000 worth of foreign securities purchased per year as per Indian foreign exchange regulations. However, this will not be applicable for IDRs which gives Indian residents the chance to invest in an Indian listed foreign entity.

17.8 Dividend Distribution tax be payable on dividend on IDRs

―Under the Income-tax Act, dividends declared by an Indian company (or any other company which has made the prescribed arrangement for the declaration and payment of dividends in India ), shall be subject to a dividend distribution tax payable by the company. Such dividends shall then be exempt from tax in the hands of the shareholder under section 10(34) of the Income-tax Act.‖ ―This exemption from dividend income under section 10(34) is not applicable to dividends paid to IDR Holders and accordingly, the dividends received by the IDR Holders in India shall be taxable in the hands of the IDR Holders.‖


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CHAPTER-18 A COMPARATIVE ANALYSIS OF INDIA’s AND CHINA’s FDI FLOW A Comparative Analysis of India's and China's FDI Flow has been summarized in the following article. The rise in the industrial sectors of India and China are regarded as one of the biggest factors which led to the huge amount of FDI inflows in both the countries. Recent studies on FDI in China have come up with interesting perspectives. Normally, the huge flows of FDI into China are projected as positive indicators for the Chinese economy; some credit rating agencies have even suggested that FDI is a reflection of that country's creditworthiness. A paper by Yasheng Huang, a don at MIT's Sloan School, proposes an amazing thesis — FDI into China is an indication of economic weakness. Comparative Analysis of India's and China's FDI Flow at a Glance China stands on a higher plane than India in terms of economy. India's per capita income is USD 440 and China's per capita income is USD 990. The population residing below the poverty line in China is 3 percent whereas in India, the population below poverty line is 30 to 40 percent. China offered investment opportunities to the foreign players much before India did and thereby attracted a raging FDI Inflows in the country. China received USD 52.7 billion of FDI inflows in the year 2002 while, India received USD 4.67 billion of FDI inflows in the same year. India Lagging Behind China in FDI Inflows According to a new World Bank report, India lags behind China in terms of attracting FDI Inflows in the country, in spite of having high-tech industries and adept workforce. The main cause behind this drawback is that India is not skilled enough to adopt the technological advancements at a fast pace. FDI Inflows only contributes to 0.8 percent of India's GDP as compared to 3.5 percent of the same in China. India's high-tech industries claim for 2.3 percent of Gross Domestic Product whereas the high-tech industries in China contributes to around 7.9 percent in the GDP of the country. India did not opened much of economic activities to the foreign players as compared to other developing nations except liberalizing trade and foreign investments. Advantages of India and China in terms of FDI Inflows The majority of the foreign investors prefer China over India for investment opportunities as China has a bigger market size than India, offers easy accessibility to export market, government incentives, developed infrastructure, cost-effectiveness, and macro-economic climate. India on the other hand has skilled and efficient manpower, talented management system, rule of law, transparent system of work, cultural affinity and regulatory environment


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CHAPTER-19 CONCLUSION The increased flow of FDI in a country has given a major boost to the country's economy. FDI has provided better access to technologies for the local economy. FDI has lead to indirect productivity gains through spillovers. Multinational firms have increased the degree of competition in host-country markets which will force existing inefficient firms to invest more in physical or human capital. Service sector has been the most sought after sector in India for Foreign Direct Investments. India, with its skilled labor and manpower has the potential to overtake China as the most preferred destination for Foreign Investments Hence measures must be taken in order to ensure that the flow of FDI in our country continues to grow.

In terms of development, there is a general agreement of the potential benefits of Foreign Direct Investment. The relationship between GDP Growth and the increase of the relationship between FDI and GDP (FDI/GDP (%)) can be clearly established. A country competitiveness which may attract Foreign Direct Investment from Transnational Corporations is determined by Comparative Factors, Economic Stability and Strong Institutions, the later taking in more importance year on year. For these reasons, countries have to implement active policies that can bring Economic Stability and that can build an appropriate investment environment for the country. .


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FDI

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